Investment bank Morgan Stanley took the position on Monday that Apple is "more likely than ever" to return some of its $76 billion in cash to shareholders and recommended either share buybacks or dividends as the most favorable options.

Analyst Katy Huberty issued a note to investors noting that Apple's $76 billion in cash reserves represent 22 percent of its market capitalization. Of that amount, roughly $29 billion, as of the second quarter of calendar 2011, is held in the U.S., while $24 billion in foreign cash is believed to be eligible for repatriation without additional tax expenses.

Apple has lately been accruing U.S. income tax on about half of its foreign income, a rare move for corporations, according to Huberty. "We believe Apple is the only company in our coverage to accrue such a significant portion," she wrote.

Should the company elect not to return cash to shareholders, Morgan Stanley predicts Apple's cash balance will grow 58 percent year over year to $94 billion by the end of the year, and to $136 billion by the end of 2012.

According to the analyst, Apple's current and future cash flows "greatly exceed" its cash needs. Huberty notes that the company has historically used its cash for capital expenditures, component pre buys and small technology acquisitions. She sees capital expenditures for Apple reaching "a run rate of $5-6 billion in the next couple of years, depending on the pace of the company's data center expansions and the outlay for its new corporate campus in Cupertino, California."

Over the past four fiscal years, Apple has disclosed four major component prepayments -- three for $500 million each and one for $1.25 billion. Meanwhile, small technology acquisitions have averaged $300 million per year during the same period. Huberty estimates that Apple's required annual spending will range from $6-8 billion.

Recently, the company implemented a "relatively new use" of its cash: bulk patent purchasing. For instance, the company spent $2.6 billion on the Nortel auction, which sold off the a collection of more than 6,000 patents.

Huberty's conservative estimate of Apple's cash flow stands at $34 billion in calendar 2011 and another $42 billion next year. Those amounts are "significantly more" than the company needs for expenditures, she wrote.

According to Huberty, stocks of tech hardware companies that have returned more cash to shareholders through share repurchases have outperformed their peers. She suggests that Apple complete a one-time $25 billion share repurchase followed by a smaller, long-term repurchase program. By reducing the number of outstanding shares, a share buyback program would raise the company's Earnings Per Share.

Though the specifics of any possible buyback would depend heavily on the current stock price and the terms of the deal, Huberty cites one example assuming a $380 stock price and $25 billion worth of buybacks. According to her, that would result in 7 percent accretion to Apple's calendar 2012 EPS, while lowering the company's share count by 66 million shares and forfeiting $125 million of interest income.

The firm also notes that tech companies that have initiated a dividend, have also historically outperformed their peers. Huberty claims Apple would face minor EPS dilution from the corresponding cash outflow, as lost interest income from a $9 billion dividend payment would only amount to $45 million.

The firm's suggested third option of making a substantial acquisition "brings the most risk," Huberty said. She asserted that large-scale mergers and acquisitions have historically had a negative impact on acquirers' stocks. She did, however, note that an acquisition with revenue synergies that help the company increase the "already formidable moat around their device-driven business model" could prove accretive for Apple.

The analyst went on to suggest that a large deal would make sense for the company if it brought in "significant subscription-based earnings" by selling services or content to complement Apple's business model.

For its part, Apple has said it is hanging on to its cash reserves to take advantage of "strategic opportunities." Last year, then CEO Steve Jobs dismissed the possibility of a dividend, noting that the company prefers to keep its powder dry for big moves.

Apple has also been said to leverage its cash balance by offering upfront cash payments to secure competitors and block out competitors. Earlier this year, Tim Cook, who then served as Apple's chief operation executive, revealed that the company had entered into $3.9 billion in long-term component supply contracts over the next two years. In the past, Apple pre-purchased a billion dollars of flash RAM, a move that Cook called an "absolutely fantastic use" of the company's cash.

Bringing its internationally earned cash back into the U.S. could pose a problem for Apple if it decides to make a big move. The company is a member of a consortium lobbying for a tax holiday that would allow U.S. corporations to repatriate an estimated $1 trillion in overseas funds.

In July, it was reported that Apple's stockpile had surpassed the U.S. government's operating balance.

Dividends would be a good idea. It would actually make the stock more attractive. Not too much though. Apple is wise to keep lots of cash on hand. There will be more lawsuits on the way, and they'll need to pay for defense. I also think there is a financial firestorm coming, and any company without a treasure chest (relative to their size) won't survive. \

since when does morgan stanley have the nerve to think that they can operate a going concern better than apple.

they are part of the gang of thieving banks that put the country into the grips of depression. borrowing money at 0% and lending it back at give or take 20%. to this day they haven't come clean while trying to outdo goldman sachs in sleaze. and throw in bank of america to the pile of manure. no more outrageous bonuses using the taxpayer as a backstop.

bring back glass steagall in full force and make these guys work for a living or make them fail. they are not too big to fail. banks and brokers must be separated.

Dividends would be a good idea. It would actually make the stock more attractive. Not too much though. Apple is wise to keep lots of cash on hand. There will be more lawsuits on the way, and they'll need to pay for defense. I also think there is a financial firestorm coming, and any company without a treasure chest (relative to their size) won't survive. \

The only way I can see AAPL doing a share buyback is if there is another financial meltdown, and their shares drop well below $300.

In fact, I would expect them to do so. Share buybacks usually destroy shareholder value because they tend to happen when the share price is high (in an effort to drive it even higher). Cook has the discipline to buy back only when the shares are grossly under valued.

Only time that companies usually do stock buybacks is when they cannot continue to increase their profits. Apple is still firing on all cylinders so no share buyback is necessary.
MS analist (not mispelled) looking for a quick boost to Apples stock price.

In order to cope up with the write-downs during the subprime mortgage crisis, Morgan Stanley announced on December 19, 2007 that it would receive a US$5 billion capital infusion from the China Investment Corporation in exchange for securities that would be convertible to 9.9% of its shares in 2010.[11]

The bank's Process Driven Trading unit was amongst several on Wall Street caught in a short squeeze, reportedly losing nearly $300 million in one day. One of the stocks involved in this squeeze, Beazer Homes USA, was a component of the then-bulging real estate bubble. The bubble's subsequent collapse was considered to be a central feature of the financial crisis of 20072010.[12]

The bank was contracted by the United States Treasury in August 2008 to advise the government on potential rescue strategies for Fannie Mae and Freddie Mac.[13]

The only way I can see AAPL doing a share buyback is if there is another financial meltdown, and their shares drop well below $300.

So you're saying you don't think Apple shares are worth buying at this price, and are only a good deal below $300? Why else would you discourage any entity from buying Apple shares (even if it's Apple itself)?

How about they build a manufacturing plant here in the United States and create some jobs. I suspect they will still make more than enough profit even if the costs are higher. American people need to start demanding that American companies think about America.

Jesus. I assume that you're an Apple shareholder. You realize that Apple is holding money that belongs to you, right?

Er, obviously I was not serious, just saying Morgan Stanley couldn't analyse themselves out of a paper bag.

And get this, based in the fractional reserve system that is a huge basis for so much world debt woes, even with $50 billion of cash, Apple could become a $500 billion dollar financial institution almost overnight... Making it one of the largest financial institutions in the world.

So you're saying you don't think Apple shares are worth buying at this price, and are only a good deal below $300? Why else would you discourage any entity from buying Apple shares (even if it's Apple itself)?

Because Apple doesn't get value from the shares it buys back? They just go into the corporate treasury and reduce the total number of available shares (not to mention the offsetting reduction to the balance sheet).

It's a stock trick used to prop up the share price of what the company believes is an undervalued stock. Does anyone think the Apple board thinks their shares are undervalued?

Quote:

Originally Posted by cameronj

Jesus. I assume that you're an Apple shareholder. You realize that Apple is holding money that belongs to you, right?

If you don't trust Apple to manage their cash hoard, you might want to sell your shares and put your money into a company more aligned with your goals.

Because Apple doesn't get value from the shares it buys back? They just go into the corporate treasury and reduce the total number of available shares (not to mention the offsetting reduction to the balance sheet).

It's a stock trick used to prop up the share price of what the company believes is an undervalued stock. Does anyone think the Apple board thinks their shares are undervalued?

If you don't trust Apple to manage their cash hoard, you might want to sell your shares and put your money into a company more aligned with your goals.

Apple isn't MANAGING their cash hoard, they're sitting on it.

And yes, I would hope the Apple board thinks their shares are undervalued, because the only other option is overvalued.

Quit the BS of "oh if you don't like it go find another company to invest in". Apple is holding my money, and I'd like to do something with it other than put it in a savings account, thank you very much.

Thankfully, they WILL do something better with it before long, and I wonder what all you dummies will say at that point?

It's a stock trick used to prop up the share price of what the company believes is an undervalued stock. Does anyone think the Apple board thinks their shares are undervalued?

While this is often the case stock buy backs are also a valid way of returning value to shareholders. If the company buys back its shares then there are fewer outstanding making the remaining shares worth more. The buying activity combined with decreasing outstanding shares causes the price to rise, thus rewarding shareholders. It is not unheard of for a very healthy company to do this when they have a lot of cash/cash flow.

That said, I think Apple should sit on its cash. I didn't see any mention in the write-up of how any of the proposed options would actually benefit APPLE THE COMPANY AND ITS EMPLOYEES AND CUSTOMERS. Its just greedy investors trying to make a quick buck.

You do realise the current GUARANTEED returns Apple gets by "sitting" on that cash hoard, don't you? The INTEREST alone from the cash hoard is enough to finance... A heck of a lot of things.

Apple is Thinking Different, even financially. Rather than finance themselves through ever more surmounting debt, they're financing themselves essentially through interest of "sitting" on that cash hoard. Why eat the cost of 5% interest on loans when you can actually GET 5% bonus interest on your own cash. Apple is essentially its own private bank now.

Even if nobody bought any Apple products for a year, Apple would still be in a better financial situation and still less prone to takeover than most large companies.

I'm guessing these analysts keep coming up with ideas in order to boost Apple's share price to where it supposed to be. It appears that not many investors are buying Apple at its current share price. Look how far Apple is away from target price estimates. Investors are eager to spend money on Netflix, Intuitive Surgical, Google and Amazon, yet they're hesitant to purchase Apple. There was some article the other day saying how investors are nervous about Apple's growth. Why? I'm not really sure.

Apple as a company is doing great, but there always seems to be some excuse as to why Apple's share price continues to lag despite being a solid, moneymaking company with what looks to be a bright future. Supposedly, the quick solution is dividends or buybacks to catch investor's interest. I'm not saying Apple should do either of them. However, I do think that Apple should be able to do something to increase Apple's valuation so investors wouldn't be so hesitant to purchase Apple stock, although I don't know what would make that happen. Of course, if Apple's share price is being intentionally manipulated, then all bets are off no matter what Apple does.

I'm long Apple since 2004, so I've made quite a bit, but recent investors are probably looking for quicker gains.

That said, I think Apple should sit on its cash. I didn't see any mention in the write-up of how any of the proposed options would actually benefit APPLE THE COMPANY AND ITS EMPLOYEES AND CUSTOMERS. Its just greedy investors trying to make a quick buck.

I will point out that Apple is quite generous in awarding stock option grants to its employees. They want their employees to be shareholders because then they will have a vested interest in seeing the company succeed. Options and outright stock purchases via ESPP are still heavily favored employee incentives in Silicon Valley. So yeah, increasing shareholder value is good for Apple employees.

Using cash to prepay for component purchases does help customers by driving down costs.

We're seeing Windows PC manufacturers having trouble with their Ultrabooks as Apple has leveraged their supply chain management mastery into building a high quality notebook computer with a COGS that other PC manufacturers can't reach.

In the end, remember that Apple, as a publicly traded corporation, has a primary responsibility in increasing shareholder value.

Well Said Scotty321. There's a reason this woman is an "analyst".... and not running her own company. She's an idiot. Seriously????? "Apple's going to return money to it's shareholders". How far can one insert their head up their own butt???? Apple's made it's shareholders a bloody fortune. I didn't make a fortune but walked away with thousands myself. Thank you Apple. This is pure libtard thinking IMO. She probably thought the Zune was a good idea too. Apple's cash belongs to APPLE.... they earned it by giving we consumers something we want to spend money on. Oh no, wait.. capitalism is so bad.... if you earn money then it belongs to someone else.... right?

Screw Her and the corrupt ass company she works for.

Try getting a job for a company that we taxpayers don't have to bail out. You screw up and make crap.... you deserve to fail. You make kick ass, high quality products like Apple does... then you deserve to reap the rewards with as much stinking cash as you want to stash for however long you want to. End of STORY.

You do realise the current GUARANTEED returns Apple gets by "sitting" on that cash hoard, don't you? The INTEREST alone from the cash hoard is enough to finance... A heck of a lot of things.

Apple is Thinking Different, even financially. Rather than finance themselves through ever more surmounting debt, they're financing themselves essentially through interest of "sitting" on that cash hoard. Why eat the cost of 5% interest on loans when you can actually GET 5% bonus interest on your own cash. Apple is essentially its own private bank now.

Even if nobody bought any Apple products for a year, Apple would still be in a better financial situation and still less prone to takeover than most large companies.

Collectively we must rethink debt and recognise its crippling nature.

Apple wouldn't pay 5% for debt, first of all. It would be around 2%. Second, Apple has no need for any debt because it is highly profitable. Third, Apple doesn't GET 5% for it's money.

It's amazing what uneducated people think about finances. Sheesh. You must think it's like magic or something.

Quit the BS of "oh if you don't like it go find another company to invest in". Apple is holding my money, and I'd like to do something with it other than put it in a savings account, thank you very much.

That's your option.

Quote:

Originally Posted by cameronj

Thankfully, they WILL do something better with it before long, and I wonder what all you dummies will say at that point?

Oh, I agree, but they won't buy a fully valued company. Probably (conjecture follows) are more interested in picking up smaller companies that can integrate products and technologies to enhance the current product lineup. Oh, and the odd patent portfolio...

Quote:

Originally Posted by TNSF

While this is often the case stock buy backs are also a valid way of returning value to shareholders. If the company buys back its shares then there are fewer outstanding making the remaining shares worth more. The buying activity combined with decreasing outstanding shares causes the price to rise, thus rewarding shareholders. It is not unheard of for a very healthy company to do this when they have a lot of cash/cash flow.

That said, I think Apple should sit on its cash. I didn't see any mention in the write-up of how any of the proposed options would actually benefit APPLE THE COMPANY AND ITS EMPLOYEES AND CUSTOMERS. Its just greedy investors trying to make a quick buck.

In MBA Finance courses, they teach the suits that this is a parlor trick to artificially prop up the stock price that is sagging, which doesn't sound like Apple to me. Buybacks don't really return value to shareholders because market forces factor that into the going rate. Esp. if the shares are held by the corporate treasury for potential later reissue.

Share buy back my arse. You want your share of Apple's cash hoard? Sell your stock. I don't know why these unimaginative wall street types think that they know better than apple how to run their business.

I would say Apple needs to hang on to that cash hoard and keep building it up. Because as they get deeper and deeper into cloud computing, they will be more vulnerable to getting squeezed by the wireless carriers. Apple needs at least $100 Billion to buy/build its own wireless network should AT&T and/or Verizon try to extract profits out of Apple by raising wireless rates to ridiculous levels. That $100 billion in the bank acts a deterrent, warning any upstart wireless carrier that Apple will have them for lunch if they start getting excessively greedy.

A share buy back is just another one of those financial gimmicks that the thieving Wall Street film flam artists have invented to fool people into believing that Wall Street created some value for them when it fact the value was there all along. In this case, in the stock price.

Yes it would, and no they'e not. Dividends used to be common among many (most?) companies. Just because Wall Street has turned into a mess that's not much more reliable than playing the lottery, doesn't mean a return to a traditional approach wouldn't improve value.

Let me give you an example: Apple's stock price is so high it creates a barrier to entry. I would not buy any shares of Apple right now, because in the current economic climate, the risk of loss is too great (I don't have the ability to gamble tens of thousands of dollars of mine, or other people's money).

But if Apple paid a regular dividend, it would make the investment worthwhile. I could buy a few shares now, and continue to purchase more over time. The point is investing money into the company now, and ensuring receipt of a benefit as they generate profits, rather than just gambling that the shares could be sold for more than they cost a few months later (or microseconds, depending on the level of habit you're addicted to).

In MBA Finance courses, they teach the suits that this is a parlor trick to artificially prop up the stock price that is sagging, which doesn't sound like Apple to me. Buybacks don't really return value to shareholders because market forces factor that into the going rate. Esp. if the shares are held by the corporate treasury for potential later reissue.

Just curious, because you CLEARLY have taken MBA finance classes. What year did you take them, and from what institution? Mine (undergrad) were at Princeton in 1998-2001.